Winner of the New Statesman SPERI Prize in Political Economy 2016

Monday 19 December 2016

Understanding free trade

A past member of the UK’s monetary policy committee once told me that they got much more intelligent questions from committees of the House of Lords compared to committees of the House of Commons. This should not be too surprising, as there are some people with considerable knowledge and experience in the Lords.

Below is an excerpt from the conclusions of a recent Lords EU Committee Report (HT Frances Coppola)
“The notion that a country can have complete regulatory sovereignty while engaging in comprehensive free trade with partners is based on a misunderstanding of the nature of free trade. Modern FTAs involve extensive regulatory harmonisation in order to eliminate non-tariff barriers, and surveillance and dispute resolution arrangements to monitor and enforce implementation. The liberalisation of trade thus requires states to agree to limit the exercise of their sovereignty. The four frameworks considered in this report all require different trade-offs between market access and the exercise of sovereignty. As a general rule, the deeper the trade relationship, the greater the loss of sovereignty.”

There you have, in one calm and measured paragraph, the contradiction at the heart of the argument put forward by Liam Fox and others that leaving the EU will allow the UK to become a ‘champion of free trade’. You cannot be a champion of free trade, and have sovereignty in the form of taking back control.

It is not a contradiction, of course, if you are happy to accept the regulatory standards of the US, China or India. That appears to be the position of Leave leaders like MP Jacob Rees Mogg. Ellie Mae O’Hagan spells out what this may mean in practice. Lead in toys - bring them in so we can sign a trade agreement with China. And you can be sure that this will be the nature of the discussion every time a trade deal is signed. In each case we will be told that we have to accept this drop in regulatory standards, because British export jobs are on the line.

This is the point of Dani Rodrik’s famous impossible trilemma: you cannot have all three of the nation state, democratic politics and deep economic integration (aka free trade). His trilemma replaces sovereignty, by which in meant in this context the nation state being able to do what it likes, by democracy. In the past I have always found this problematic. Surely a democracy can decide to give away a bit of its sovereignty in return for the benefits of international cooperation (in the form of trade deals, or indeed any other kind of international cooperation). After all, every adult in a relationship knows that this relationship means certain restrictions on doing just what they would like.

At first sight, it would seem as if the Brexit vote shows Rodrik is right. Democracy voted to take back control, which means reducing trade integration. But I think it is becoming increasingly clear that this is the wrong interpretation. Voters were told they could take back control and be no worse off, and polls make it clear that message was believed by many Leave voters. As it becomes clear that people will be worse off, as depreciation induced inflation cuts real wages, opinion is changing. Polls already suggest that if the vote was held again, we would get a different result. Polls also suggest more voters want to prioritise favourable trade deals in negotiations, not curb immigration. Over the next year or two this will only intensify, as prices rise, as companies make plans to leave the UK, as the problems caused by declining immigration emerge, and as the UK’s weak negotiating position becomes clearer.

Leavers know this, hence the attempts to remove any kind of democratic oversight from the Brexit process. At present MPs appear transfixed by the light of the Brexit vote, even though most know Brexit is an act of self harm. But it was utterly predictable from the day that Corbyn was re-elected that we would see a revival of the Liberal Democrats. As they chalk up election victories, it might just be possible that we could yet see some democratic oversight of the Brexit process. [1]

To see a model of what could and should happen, look to Switzerland, where referendums are part of political life. In February 2014 Switzerland voted to restrict immigration from the EU, even though this jeopardised their trade relations with the EU. Since then the EU has insisted that its bilateral trade deals with Switzerland depend on free movement. As a result the Swiss parliament has backed down, and just passed measures which greatly diverge from the referendum proposal, even though in Switzerland referendums are (unlike the UK) meant to be constitutionally binding.

So we see in Switzerland, and perhaps we will see in the UK, that parliamentary democracy can be compatible with trade integration. Rodrik is right that deep trade integration (the pressures from which will continue, as Richard Baldwin outlines) puts pressure on the ability of nation states to decide on their own laws, but a democratically negotiated compromise is possible. (After all, national languages are a barrier to trade.) Perhaps the examples of the UK and Switzerland suggest two things: first that these negotiated compromises should be out in the open rather than done behind closed doors, and secondly that what is very difficult to mix are trade integration with national referendums.

[1] The conventional logic is that MPs would go along with Brexit because the Remain vote is concentrated in too few constituencies. But outside Scotland the Leave vote is now split three ways (Conservative, Labour and UKIP). Labour may mock the LibDems as Brexit deniers, but as the LibDems get the votes not only of people who deeply care about being part of Europe (see the surge in Remain identity noted here) but also of those that voted Leave but are now getting concerned, they will be the ones with the last laugh.


  1. Yes, of course nations need to agree regulatory standards for the thing that is being traded. That is just normal life.
    Re: lead in toys from China - where do you think toys come from now?? I don't know why they should be putting extra lead in ones destined for the UK. Unless we want it. Which we don't.
    Switzerland is different, so many EU producers adopt stricter Swiss regulations so their products can we sold across EU and CH.
    France has adopted unique restrictions, and Germany is in the process of developing her own code, along the lines of the Swiss one.

  2. If you look at the etymology of 'referendum' and 'plebiscite' you find that they come into English from French and German, the first of the two via Switzerland in the middle of the 19th century.

    As I posted before, Britain has the precedent of the 1909 and 1911 elections to remove the House of Lords veto power to show our electoral system can become referendum-like when it wants; it does not need the quintessentially continental European way of not dealing with its political problems, i.e. the referendum.

    As an aside, The Sunday Politics yesterday (starting 11am BBC 1 on the iplayer), from 1:07:50 into the show has Andrew Neil explaining why Trump is a 'Keynesian'.

    More of the licence fee slipping down the cloaca.

  3. Lib Dem popularity because of Corbyn? Er, he's been leader for over a year and the LDs are still only managing to poll at 9% the same as during the coalition. Before 2010 they polled at 15-20%.

    1. I said since Corbyn's re-election, because under Smith Labour would be clearly anti-Brexit. But the point about the national polls is interesting: the LibDems are winning local elections everywhere, yet their national poll position remains low. I suspect local elections are a leading indicator of national polls, because in the former people rethink their positions.

    2. Perhaps; but it's a small number of people to rethink their positions before 2020. As a leading indicator I suggest the sample size is too small to make it any use since tht total seats is 650-odd. Remember when Labour won the Glenrothes byelection in 2010? Leavers might be motivated to get out and vote LD in beyelections (if that's why LDs are winning then, that is) because for now their seat only affects parliamentary votes on Brexit, and not the complexion of the UK govt. In 2020 that won't be the case and Brexit may be a done deal by then, changing voting behaviour again accordingly.

    3. «the LibDems are winning local elections everywhere, yet their national poll position remains low.»

      Local elections are "it would be nice if", national ones are "this is about what I really care about" ones.

      In 2004 the local elections were a catastrophe for New Labour as voters, when it did not really matter, were fed up with Blair and company, Iraq and PFI etc. But in 2005 they re-elected New Labour and Blair, because what really mattered was that he kept pushing up southern property prices and share prices, and they still remembered the Conservatives letting southern property prices fall in the early 1990s.

      Southern UK voters don't fire a government that is «competent at running» up their property prices, and fire instead a government that is «causing austerity» of their property prices.

      Remember writing: «I’ve been told of one meeting where the response to the argument that EU membership had increased GDP was ‘maybe your GDP but not my GDP’.»

      For many if not most southern voters "my GDP" means the prices of their properties. That's what they think of as "the economy" and "austerity".

  4. I have always interpreted the "taking back control" as applying mainly to immigration but also in respect of general legal sovereignty. The argument you about this tacking back control in respect of free trade is a somewhat more subtle one that would be lost on most and, if it were not, would not be denied because I believe that many would think like me.

    As far as polls now suggesting that people would prioritize free trade over immigration and that therefore your argument may be right is rather disingenuous; what they mean by free trade and what you mean may be quite different so to conclude that the argument has swung due to the recognition that free trade may require a limitation of sovereignty is stretching it somewhat.

    As an economist you have no difficulty with this because you recognize that there are always trade offs in these matters (free trade requiring a limitation of sovereignty), but most may not see things this way; they may be talking about different things.

  5. I think this is spot on - there's a difference between agreeing to reciprocal restraint on the exercising sovereignty and actually losing sovereignty. Which exposes an interesting paradox: the very act of Brexit demonstrates one of the main arguments for Brexit to be false.

    1. There's political sovereignty and legal sovereignty. The UK remains legally sovereign for as long as it's an independent country. It can make whatever laws it wants including entering and leaving the EU. No country has full political sovereignty because what it can do is affected by other countries. In the case of us being an EU member, our political sovereignty is limited by having to abide by EU legislation, and the right to free movement of goods/capital/people, and many people have wanted that bit of our sovereignty back.

      Similarly many Scot nats want legal sovereignty, or want more political sovereignty than is available under devolution.

    2. There is an interesting "detail" as to this: the "Remain" campaign largely omitted to mention that the UK government has had for 43 years a veto on any major EU decision, in practice a weapon with which it could have made the EU unworkable (until expulsion), which it has used ruthlessly to get huge "opt-outs".

      Why did the "Remain" campaigners not mention that much the veto and the frequent blackmail that the UK governments used?

      Likely because then they would have had to admit that Westminster (and Whitehall) had been in control all the time, and all the policies that "Leavers" were unhappy with were not the result of Brussels taking away control from Westminster, and therefore voters needed to take back control from Westminster (and Whitehall) instead of Brussels.

  6. I think it is wrong to see free trade as undeniably beneficial. It may appear so from the perspective of those involved in trade but from a democratic perspective it is less clear, especial for example when look at in the context of global warming. The race to the bottom aspect of modern trade also means that many people are losing out, while many of those that gain are faced with small improvements that are made to look significant simply because they are compared with an extremely low starting point.

  7. SWL I think you're basically right about the Brexiters being contradictory, but that's at least partly because people voted for it for disparate reasons. And even the Lords committee resorts to the phrase "comprehensive free trade". That's the problem with the word "free" in "free trade". How "free" do you want? If Fox et all want more (political) sovereignty than you get in the EU, what's left of free trade may be free enough for them. Are the non-tariff barriers that go up a price worth paying?

    Ari Andricopoulos is good here about diminishing returns from what he calls "ever freer trade". The marginal utility of a third steak for tea is not much! And as I expected from a casual glance at the history of British economic growth, EU membership has left it not visibly changed for EU members. Can say the same for allowing A8 immigration. Where's the benefit? Now the Eurozone has a depression and the UK is seething with rage over immigration. This much free trade really worth it? Maybe if we look at such graphs really really closely.

    Also voting for disparate reasons are the Remainers! Some (like me) thought a mere referendum result could trigger a recession, and I still wonder if completing the Article 50 process would do that. Some are middle class people with big savings and investments who fear any disruption to UK-EU business will harm their personal finances. Funny we don't hear more about them. Some young people seemed to want to make sure the job market doesn't get any worse than it is already. Some liked EU regulation because they believe it will be more social democratic than Thatcherite Britain. And some people really did think EU membership somehow protects us from a European war (as if the atomic bomb wasn't preventing it) or that less immigration would be xenophobic. Remainers are not simply a big group of people who want "comprehensive free trade" or even know what it is. No wonder it was hard to make the case to stay.

  8. If you are going to write about "Understanding Free Trade" then you should define the term. There is tariff-free trade but this is not the same as free trade. Free trade in reality does not exist because there is always government involvement, either through tariff barriers or through subsidies, low-interest loans, tax concessions and laxity in dealing with externalities.

    Rodrik wrote: "The new model of globalization stood priorities on their head, effectively putting democracy to work for the global economy, instead of the other way around. The elimination of barriers to trade and finance became an end in itself, rather than a means toward more fundamental economic and social goals. Societies were asked to subject domestic economies to the whims of global financial markets; sign investment treaties that created special rights for foreign companies; and reduce corporate and top income taxes to attract footloose corporations."
    He’s right – politicians went too far and mostly economists didn’t try to stop them.
    When Rodrik was finishing his book ‘Has Globalization Gone Too Far?’ he approached a well-known economist to ask him if he would provide an endorsement for the back cover. The economist demurred. He said he didn’t really disagree with any of the analysis, but worried that the book would provide “ammunition for the barbarians.” Well, they are now through the gate and it’s too late…

  9. It's terribly sad to see Labour go like this. But when it is staffed by people who think foreign investment, foreign workers and foreign demand are all *sooo* much better than their domestic British equivalent then it is hardly surprising.

    Labour need to refocus on ensuring every resident of these islands has a living wage job, a home to live in and a pension to look forward to. But that requires a refocus on the domestic and a rejection of the foreign as largely irrelevant to the issues at hand.

    Can't see that happening unfortunately.

    Simon this is just your perception because you are filtering through rose tinted specs. Take them off. The EU is a corporate kleptocracy ruled by corporations - as the Greeks have found out to their cost.

    "After all, every adult in a relationship knows that this relationship means certain restrictions on doing just what they would like"

    We can't trust large corporations to be the 'adults.' Here is a good salutary warning of what the world becomes when run by big corporations with no accountability:

    There have been two free trade periods in the world - both have resulted in the immiseration of the poor and a lack of investment opportunities. That's because there is no world government, no global transfer area and there never will be. So the pursuit of such a process is a way of trying to eliminate *any* government and turn the world over to large corporations. Not going to happen.

    So the alternative is the Westerphalian system where countries are highly cohesive within themselves and loosely coupled to the rest of the world.
    It's not about stopping foreign trade. It's about moving it from the number one obsession that it is at the moment down the list below domestic concerns.

    Your set of people are obsessed with foreign investment, foreign workers and foreign demand all of which you think are superior to their domestic equivalents with no evidence for that position whatsoever.

    Large corporations *cannot trade* in a country unless they are permitted to do so. So the idea that they rule is just defeatism. Or rather that you would prefer their rule than that of elected politicians who might actually look after the poor rather then pander to the intellectual elite.

    There are huge benefits in the current environment for any nation that extracts itself from the global oligopoly and puts in place clever restrictions that shift the focus to domestic production.

    "A country that withdraws from free trade agreements and reorients its economy for the production of goods for domestic consumption might thus expect to see some improvement, not only in the prosperity of its working people, but in rates of return on investment."

  10. I Know it is important to get on with and reference MIT heavy weights, but must you refer to Rodick? Historians have long known about the how globalisation may not be compatible with with national sovereignty and democracy, and is heavily associated with marginalisation and community breakdown. But the real meat of this story is in the historical, Marxian and other such literature. In fact this is a big part of what Marxism is about. The trilemma is another one of these neo-classical gadgets and gimmicks which really distracts, rather than deepens, our knowledge and understanding.


  11. You are right of course about the need for trade offs between free trade and national sovereignty.

    A lot of the political rhetoric about "sovereignty" and "independence" is about the symbols of national identity - passport covers , flags , anthems etc. than real power for the people of a country. Nigel Farage is constantly claiming that getting rid of the mention of the EU on his passport cover is his real achievement.

    It is not just free trade that requires limitations on national sovereignty to enable intentional cooperation. In fact most human problems require international cooperation - global warming , restarting economic growth , ending conflict and violence.

    Very few political leaders in the UK have the courage to tell people that national independence is often mythical (or purely symbolic as outlined above). Sooner or later somebody is going to have to level with people about this.

    One more point - trade deals with China and India are not going to be the piece of cake that Liam Fox seems to think. But the one to really worry about is the one with the Trump administration. TTIP had many faults but does anybody seriously think that Britain , negotiating on its own , is going to get a better deal than the whole of the EU negotiating with Obama ? We are going to get trussed up like a Christmas turkey and roasted alive. That would indeed be a suitable task for that phoney patriot Nigel Farage to perform.

  12. «the Remain vote is concentrated in too few constituencies. But outside Scotland the Leave vote is now split three ways (Conservative, Labour and UKIP)»

    That's not quite the whole story:

    * About half of seats are safely Conservative or Labour, even if recent events show that is no longer such a sure thing.
    * The other half of seat are vulnerable. MPs of either major party from them are terrified of a swing, and in particular of "Leavers" swinging away from them, even if not necessarily to the other major party, a swing to UKIP might be enough to lose their seat to the previously second-place other major party's candidate.
    * The current parliamentary majority is Conservative, and it is their marginal constituency MPs who are most terrified of losing on a swing to UKIP. Instead most current Labour MPs are such because their seats proved fairly safe.
    * There is a high chance that constituency boundaries will be redrawn before the following elections, meaning that many MPs voting to nullify the referendum would first have to be endorsed by their local Conservative Club or Labour party branch to stand as party candidates...

    What would free many MPs, especially Conservative MPs, to vote to to nullify the referendum would be the guarantee of well paid directorships or quango appointments for the rest of their life, and I guess that there would need to be a guarantee that there will be at least 200 to allow enough MPs to "vote their conscience" and do "what's best for the country" even at the cost of probably losing their seats at the following election. I don't think that there are at least 200 guaranteed sinecures-for-life on the table. Perhaps the CBI could step forward.

    I still think that what's attainable is a form of soft-Brexit, because for that there is political support in the referendum numbers, and is what most "Leave" leaders campaigned for.


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